Fiscal cliff deal sends stocks into biggest rally in a year… but U.S. is warned it may STILL lose AAA credit rating

Submitted by IWB, on January 3rd, 2013

The ‘fiscal cliff’ compromise, even with all its chaos, controversy and unresolved questions, was enough to ignite the stock market on Wednesday, the first trading day of the new year.

The Dow Jones industrial average careened more than 300 points higher, its biggest gain since December 2011. It’s now just 5 percent below its record high close reached in October 2007. The Russell 2000, an index that tracks smaller companies, shot up to 873.42, the highest close in its history.

The reverie multiplied across the globe, with stock indexes throughout Europe and Asia leaping higher. A leading British index, the FTSE 100, closed above 6,000 for the first time since July 2011, at 6,027.37.

While investors celebrated the deal, credit rating agencies warned that it was not enough to avoid a downgrade.

Moody’s Investors Service said it expects lawmakers in the coming months will take additional steps needed to lower the deficit, which has topped $1 trillion annually in each of the past four years. But if it fails to do so, the government’s ‘Aaa’ credit rating could be at risk.

Moody’s had warned in September that it would likely cut its rating by one notch if the year-end budget negotiations failed. Moody’s has a negative outlook on the government’s debt, a warning of a possible downgrade.

In a separate statement, Standard & Poor’s warned that the budget agreement did little to put the government’s finances on a ‘more sustainable footing.’

S&P said it would not change its rating based on the deal. In August 2011, the credit rater stunned investors by lowering its rating on long-term U.S. government debt to ‘AA+’ and assigned a negative outlook to the rating. That followed a contentious battle to raise the government’s borrowing limit.

On Wednesday, S&P offered a harsh reminder of why it stripped the U.S. of its top rating, along with a warning about the current negotiations.

‘Washington’s governance and policymaking had become less stable, less effective and less predictable,’ it said. ‘We believe that this characterization still holds.’

Despite the reaction of credit rating agencies, stocks rose sharply Wednesday. For every stock that fell on the New York Stock Exchange, roughly 10 rose. All 30 stocks that make up the Dow rose, as did 94 percent of the stocks in the Standard & Poor’s 500 index.